Building a global markets portfolio

Read these in this order

16 frameworks. Each one ends in a number rather than an opinion.

1. 01
   What diversification does, and does not

   Diversification removes the risk specific to any one holding and does nothing about the risk shared by all of them, which is why a portfolio of thirty companies in one country or six apartments in one city is far less diversified than the number of lines suggests.

2. 02
   Allocation by horizon

   Allocation by horizon assigns each pot of money an asset mix based on when it will be spent rather than on the owner's appetite for risk, because a deposit needed in eighteen months and a retirement fund needed in twenty five years are different problems that a single risk profile cannot answer.

3. 03
   The three fund portfolio, and why it breaks for expatriates

   The three fund portfolio holds a total domestic equity fund, a total international equity fund and a total domestic bond fund at market weights, and its weakest assumption is the word domestic, which has no meaning for an investor with no home bond market.

4. 04
   What bonds are for

   Bonds are held to provide a predictable payment stream and to behave differently from equities when equities fall, not to produce high returns, which means the right question about a bond holding is what job it does in the portfolio rather than what yield it shows.

5. 05
   Where cash should actually sit

   Cash held for a known purpose belongs in an instrument that matches when the money is needed, which for most horizons means a short dated government bill or a fund of them rather than a current account, because the gap between the two is a real return given away for nothing.

6. 06
   Fund domicile, and the sixty thousand dollar trap

   For an investor who is not a US person, holding US domiciled funds exposes everything above sixty thousand dollars to US estate tax at rates rising to forty percent, while the identical index held through an Irish domiciled UCITS fund generally carries no such exposure and half the dividend withholding.

7. 07
   Fee drag

   Fee drag is the compounding cost of every percentage charged against a portfolio each year, and because it is deducted from the base that would otherwise have compounded, a one percent annual fee costs far more than one percent of the final result.

8. 08
   Rebalancing bands

   A rebalancing band is a rule that triggers a trade only when a holding drifts beyond a set distance from its target weight, which keeps a portfolio close to its intended allocation while trading far less often than a calendar schedule would.

9. 09
   Sequence of returns risk

   Sequence of returns risk is the fact that the order in which returns arrive changes the outcome as soon as money is being paid in or taken out, so two portfolios with identical average returns can leave one retiree comfortable and the other out of money.

10. 10
    Glide paths, and the one that rises

    The standard advice is to hold less in equities as you age, the research that examined it most carefully found a rising path did better, and a second body of research using a century of international data found the opposite, which is the honest state of the question.

11. 11
    Sixty forty, and its critics

    Sixty forty is a portfolio of sixty percent equities and forty percent bonds, and the recurring argument about whether it is dead is usually an argument about the last three years being mistaken for an argument about the next thirty.

12. 12
    Where a return actually comes from

    Any expected return breaks into three parts, income, growth in that income, and a change in what the market pays for it, and the third part is the one nobody can forecast and almost every projection quietly assumes.

13. 13
    CAPE, and what it does not tell you

    The cyclically adjusted price to earnings ratio divides price by ten years of inflation-adjusted earnings to smooth the business cycle out of the denominator, and it carries useful information about long-run returns while carrying almost none about the next year.

14. 14
    The Fed model, and the error inside it

    Comparing an earnings yield with a government bond yield feels like comparing two prices for the same thing, and it is not, because one of them already contains inflation and the other does not.

15. 15
    Gold and real rates

    Gold pays no income, so its main competition is the real yield on a government bond, and the relationship between the two explains more of gold's behaviour than inflation does even though inflation is the reason most people say they hold it.

16. 16
    Lump sum versus cost averaging

    Vanguard's research across US, UK and Australian markets found that investing a lump sum immediately beat spreading it in over twelve months in roughly two thirds of the historical periods tested, because markets rise more often than they fall.

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